The court reasoned that “Fremont as a lender should have recognized that loans with the first three characteristics …were ‘doomed to foreclosure’ unless the borrower could refinance the loan at or near the end of the introductory rate period, and obtain in the process a new and lower introductory rate.” The court also found that the fourth characteristic, the prepayment penalty, “would make it essentially impossible for subprime borrowers to refinance unless housing prices increased…” – Mass Courts
Unfair and deceptive mortgages. Lemon loans. Defective credit instruments. Toxic loans.
These names have been regularly used over the last year on this blog and it looks like the honorable judges in Massachusetts are starting to agree with me.
Just this past month I reported that Massachusetts Attorney General Martha Coakley office announced that they have secured preliminary injunctions to prevent Option One Mortgage Corp. and H&R Block Mortgage Corp. from initiating or advancing foreclosures on home loans that may have been secured using unfair and deceptive business practices.
Now, in a landmark decision, the Supreme Judicial Court of Massachusetts issued it opinion upholding the lower court’s order in the case of Commonwealth v. Fremont Investment & Loan & another, 452 Mass. 733 (2008) (Botsford, J.) from foreclosing on any “structurally unfair” loan without further prior court approval and a final hearing on the merits.
The lower court’s ruling of February 25, 2008 was the first of its kind that restricts a lender’s ability to foreclose based on unfair or deceptive mortgage misconduct.
The trial court issued the preliminary injunction upon a finding that Fremont’s loans were “unfair” based on four characteristics of the loans.
1. The loans were ARM loans with an introductory rate period of three years or less
2. They feature an introductory rate for the initial period that was at least three per cent below the fully indexed rate
3. They were made to borrowers for whom the debt-to-income ratio would have exceeded fifty percent measured on the fully indexed rate, and
4. The loan-to-value ratios were 100% or the loan featured a substantial prepayment penalty.
The court reasoned that “Fremont as a lender should have recognized that loans were ‘doomed to foreclosure’ unless the borrower could refinance the loan at or near the end of the introductory rate period, and obtain in the process a new and lower introductory rate
The court’s preliminary injunction required Fremont to work with the Attorney General to “resolve” their differences regarding foreclosure, presumably through a loan workout.
Most of the involved Fremont loans, which were procured through independent mortgage brokers who received commissions, were subsequently sold to the secondary market with Fremont acting as servicer for the purchaser.
The court’s order requires Fremont to “explore alternatives to foreclosure” and then seek approval of the court to foreclose which may not be granted, leaving the preliminary injunction in place until the Attorney General has the opportunity to have a final hearing on the issue of unfairness.
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